acg exam 1
Financial forecasts
- set of future financial statements, given expected conditions
Two kinds of subsequent events
...provide additional evidence about a conditions that existed at the balance sheet date ...provide evidence about conditions that did not exist at the balance sheet date
The International Accounting Standards Committee (IASC) was founded in
1973
Annual report can be filed using either IFRS or the company's local GAAP on form
20-F
International Financial Reporting Standards (IFRS)
Attempt to create standard principles-based accounting determined by International Accounting Standards Board (IASB) Increased globalization requires improved comparability
Still the fact remains that _________ includes far more details at present than _______
U.S. GAAP, IFRS
Financial Forecasts Pros
better facilitates decision making already done so regulation improves quality
Insurance contracts, FASB: currently
currently contracts are recognized as insurance is provided, life insurance revenue recognized as due
Reporting for diversified companies should
disagreggrate results by operating segment
Selecting same criteria for segment disclosures referred to as the
management approach
Pros/Cons of full disclosure
more informed decision making, uncover fraud more costly, info overload
If foreign company has local GAAP,
must reconcile to GAAP
the 20-F allows
non-U.S. company to use IFRS as promulgated by the IASB or to retain its local GAAP reporting.
Disclosure of non-recognized events is not required for
non-accounting events or items disclosed some other way
Companies should disclose events when
non-disclosure would cause the financial statements to be misleading
The most important component of a registration statement is the
offer prospectus
In general, U.S. IFRS are considered to be more
principles-based
Safe Harbor Rule
protects company that makes an erroneous forecast as long as it was prepared on a reasonable basis
GAAP hierarchy
refers to how an entity identifies the sources of accounting principles and the framework for selecting the principles used in preparing financial statements
Classification & measurement of financial instruments: IASB
require entities to separately account for embedded derivatives and the financial instruments
In general, U.S. GAAP are considered to be more
rules-based
Financial projections
set of future financial statements, given hypothetical conditions
Impairment of financial instruments: The FASB has proposed an expected credit loss model that examines the amount of credit losses over
the full lifetime of a financial instrument.
Lease Accounting IASB:
the lease is a capital lease if the lease term is for a major part of the economic life of the asset (vague)
Thus one important issue that the SEC must face in considering removing LIFO
the potential costs incurred by firms to switch from LIFO to another method.
Proposed Insurance contracts approach
using a present value approach with any excess of expected premiums over expected claims amortized into income over the period the insurance is provided
Customer consideration model: revenue is recognized
when there is an increase in the contract asset or a decrease in the contract liability from satisfying performance obligations
the FASB Accounting Standards Codification (ASC)
will become the source of authoritative accounting and reporting standards for nongovernmental entities in the U.S.
Accounts receivable turnover
Activity Ratio Sales net of returns / avg. AR
Asset turnover
Activity Ratio Sals net of return / Avg. TA
Disclosure Issues
Related Party Transactions Post-Balance-Sheet Events (Subsequent Events) Reporting for Diversified (Conglomerate) Companies Management's Discussion and Analysis Forecasts and Projections Financial Statement Analysis
Inventory turnover
Activity Ratio COGS / Avg. Inv.
component depreciation
Break property into smaller, depreciable parts
Identifiable Assets Test
Report segments with identifiable assets greater than 10% of sum of all identifiable assets
Profit or Loss Test
Report segments with profits greater than 10% of Cum. profits or abs(Cum. losses)
Condorsement of IFRS
Converge what exists as much as possible (while minimizing costs) For new standards, add necessary provisions for use locally
Best solution to merge IFRS & GAAP
Convergence
Revenue Test
Report segments with revenues greater than 10% of Cum.
When a foreign company wants to sell shares on an United States based market, they file a
F-1
A first-time offer of securities by any non-U.S. company that comes under the definition of a "foreign private issuer" requires filing an
F1
2005-2009 IFRS adoption
FASB and IASB committed to convergence of U.S. GAAP and IFRS and identified key convergence projects
Lease classification difference
FASB believes that there are important differences between leases that convey the right to use versus an in-substance purchase. The IASB believes the asset should be classified according to the nature of the asset.
Full disclosure principle
Financial reports should include all financial facts that would influence the judgment of an informed reader
Financial Forecasts Cons
Forecasts always wrong provide incentives for earnings mgmt inaccurate forecasts penalized
Financial periods presented difference
GAAP: 2 years BS, 3 rest IFRS: 2 years for all
Balance sheet presentation difference
GAAP: Classified or Non-classified, dec. liquidity order IFRS: Classified format, inc. liquidity order
Statement of cash flows difference
GAAP: Direct or Indirect IFRS: Can begin with indirect, less guidance on operating, investing, and financing
PPE difference
GAAP: Historical cost IFRS: Historical cost or reevaluated amt
Development costs difference
GAAP: R&D expensed IFRS: R&D capitalized
Contingent liability difference
GAAP: Record if probable and estimable IFRS: Not recognized
fin. instruments difference
GAAP: accounting depends on type of instrument IFRS: accounting depends on cash flow from instrument
Income statement presentation difference
GAAP: expenditures listed by function IFRS: expenditures listed by function or nature
Inventory difference
GAAP: lower of cost or MV; LIFO allowed IFRS: lower of cost of NRV; LIFO prohibited
Leases difference
GAAP: operating vs capital leases differ IFRS: operating vs capital leases same presentation
Insurance contracts difference
GAAP: profit recog. by type of contract IFRS: profit recog. by timing of pmts and risk of pmt
Unusual items difference
GAAP: reported on IS & notes IFRS: reporting on IS is optional, notes are required
Initially, the IASC made decisions on accounting issues and reported them in the form of
IAS
Component Depreciation difference
IFRS requires, GAAP allows
Recognized subsequent events
Information that the accountant would have recorded, had it been known before the books were closed
In January 2001, the IASC announced formation of the
International Accounting Standards Board (IASB)
Standard setter for IFRS is the
International Accounting Standards Board (IASB)
IASB is responsible for issuing standards known as
International Financial Reporting Standards (IFRS)
Newer standards are called:
International Financial Reporting Standards IFRS
Segment Disclosure - Cons
Investor needs to be knowledgeable about more industries to avoid misinterpretation "Enemies" (e.g., competitors) may use information against company Managers may avoid risks (even when they are worth it) for fear of how loss will look when disaggregated Accounting at segment level is not always meaningful Preparing disclosures is hard
Segment Disclosure - Pros
Investors can better forecast future profits and cash flows Investors can better estimate the overall worth of a company Absence of segment disclosure puts non-diversified companies at disadvantage
Current cash debt coverage
Liquidity ratio Net cash provided by operating activities / Average current liabilities
Current Ratio
Liquidity ratio current assets / current liab.
Quick ratio
Liquidity ratio current assets / current liab. (Excluding Inv.)
Convergence Approach
Maintain local standards and work with IASB to converge standards over time
Management Disclosures include
Management's Discussion and Analysis Management's Responsibility for Financial Statements
Morlan Corporation is preparing its December 31, 2017, financial statements. Two events that occurred between December 31, 2017, and March 10, 2018, when the statements were issued, are described below. What effect do these subsequent events have on 2017 net income? A liability, estimated at $160,000 at December 31, 2017, was settled on February 26, 2018, at $170,000. A flood loss of $80,000 occurred on March 1, 2018.
Net income will decrease by $20,000 ($170,000 - $150,000) as a result of the adjustment of the liability. The settlement of the liability is the type of subsequent event which provides additional evidence about conditions that existed at the balance sheet date. The flood loss ($80,000) is an event that provides evidence about conditions that did not exist at the balance sheet date but are subsequent to that date and does not require adjustment of the financial statements.
Requires disclosure? Legislation
No
Requires disclosure? Management changes
No
Requires disclosure? Product changes
No
Requires disclosure? Strikes / Unionization
No
Requires disclosure? Unionization
No
US concerns about the IASB
No government agency oversees IASB 25% of financing came from major accounting firms
If foreign company has IFRS filing,
No reconciliation
Endorsement Approach
Pick and choose which parts of IFRS to incorporate into local standards
U.S. Generally Accepted Accounting Principles (GAAP)
Primarily rules-based standards of accounting determined by the Financial Accounting Standards Board (FASB)
How does management split the company when making decisions?
Products and services Geography Legal entity Customer type
Profitability Ratios: Operations
Profit margin on sales ROA
ROA
Profitability NI / Avg. TA
Profit margin on sales
Profitability NI / Net Sales
Liquidity Ratios
Ratios that measure the company's short-term ability to pay its maturing obligations.
subsequent events that require adjustment to the fin stmt
Recognized subsequent events
non-recognized subsequent events provide evidence
about conditions that did not exist at the balance sheet date
Segment is significant if it passes one or more of the following tests:
Revenue Test Profit or Loss Test Identifiable Assets Test And sum of reported segments ≥ 75% And number of segments ≤ 10
"Active" Convergence Projects
Revenue recognition - fully converged Leases - discontinued Insurance costs - discontinued Financial Instruments - partial convergence
When a domestic company wants to sell shares on an United States based market, they file a
S-1
a firm can choose to report its local GAAP not IFRS as long as
The firm may either (1) reconcile net income and the shareholders' equity, thus showing earnings based on U.S. GAAP; or (2) fully disclose all financial information required of U.S. firms, including such detailed information as segmental disclosures.
Requires disclosure? Business combinations
Yes
Requires disclosure? Losses due to natural disasters
Yes
Requires disclosure? New significant commitments
Yes
Requires disclosure? Sale of bond or stock
Yes
Impairment of financial instruments: The IASB has proposed an expected credit loss model that examines the amount of credit losses over
a 12-month period for estimating losses
operating segment
a component of the business that: Earns revenues and incurs expenses Has its results reviewed regularly by the chief operating decision-maker (e.g., COO, CEO, etc.) Generates distinct financial information
recognized subsequent events provide additional evidence about
a conditions that existed at the balance sheet date
Revenue is recognized only when
a performance obligation is satisfied by transferring goods or services.
Insurance contracts, IASB: the profit element of insurance contacts is divided into two components:
a risk element and a contract margin.